Blues audit excess rent payments Total over 20 years put at $30 million

January 15, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

Blue Cross and Blue Shield of Maryland is auditing millions of dollars of its payments for the Owings Mills headquarters complex because the company is concerned about why it is scheduled to pay up to $30 million more than is called for in its lease.

The headquarters buildings are owned by a partnership formed by the Blues and the Rouse Co.; the Columbia development company also receives management fees and oversees all operations of the complex.

Blue Cross officials have concluded that most of the extra money the insurer is paying on the 20-year lease is in lieu of an escalator provision -- absent in its lease agreement but standard in such contracts -- that automatically raises payments to compensate for future inflation.

But the officials agree that the insurer's arrangement with Rouse is so complicated that even they aren't sure what it means. The company will seek to clarify and possibly renegotiate terms of the lease when the mortgage debt on the headquarters is refinanced later this year, they said.

The discrepancy -- between the terms of the lease and a separate schedule of payments the Blues have agreed to make -- came to the attention of the company's treasurer, Rosemarie Kathleen Schwartz, when she reviewed the lease last year.

She calculated the difference to be at least $30 million over the life of the lease, and urged Blues officials to renegotiate with Rouse. She disclosed her concerns in a deposition taken last September by a Senate subcommittee during a probe it conducted into the financial condition of the Maryland Blues plan.

Martin D. Klenke, a Blues official who investigated the lease in response to a reporter's questions, said few people in the company understand the lease and why it omitted any provisions specifying the extra payments.

Mr. Klenke, director of corporate finance, described the insurer's audit as "routine" and the relationship with its partner as good. But he said the company will seek a better deal from Rouse

when the buildings' financing is renegotiated later this year.

He said the internal review will cover construction costs of the headquarters and current management services and fees charged by Rouse. In addition, the lease itself is under review by Blues lawyers and is expected to be clarified.

The review will also look into the partnership. The Blues pay the mortgage; Rouse is the general partner and manages the complex, according to Blues officials, and partnership profits are split between the Blues and Rouse. After the mortgage is paid in 20 years, Rouse and the Blues will each own half the complex.

Rouse officials declined to discuss the lease or partnership agreements, and neither party would make public a copy of the agreements.

The headquarters, 400,000 square feet in two buildings at the intersection of I-795 and Mill Run Circle, is the biggest financial transaction ever made by Blue Cross and Blue Shield and obligated the insurer to make rent payments exceeding $100 million over two decades.

The headquarters cost $69 million -- $12 million more than originally estimated -- and Mr. Klenke stressed that Blues officials signed for the extras as they were incurred. Between $5 million and $6 million of the extra cost was the result of requests by the Blues, including a marble lobby and a decision midstream to relocate the insurer's computer center to a separate Rouse-developed building in Columbia.

The partnership borrowed $60 million for the buildings, which became the anchor for development along the I-795 corridor, Mr. Klenke said. He said Rouse put additional capital into the partnership early on, covering down payments and land costs.

Because the partnership, not the Blues, is directly responsible for the debt, the insurer was not required to discuss its long-term financial impact in reports to state regulators. Instead, the Blues report an annual rent payment and income from the partnership.

According to a partial schedule of payments obtained by The Sun, which state regulators said they had not seen, the insurer is to pay $45 million for the six years 1992 through 1997.

The insurer's public annual reports reflect a large commitment for future lease payments. The company's cumulative building and equipment lease obligations jumped nearly $135 million to $210 million between the end of 1986 and 1988, after the headquarters lease was signed.

These obligations compare to a $200,000 mortgage that remained on its Towson headquarters in 1988, before it relocated. The Blues, however, consolidated some operations that had been in rented facilities elsewhere when it moved into the Owings Mills complex.

The lease sets the insurer's annual rent at the same amount as the annual mortgage payment, but the schedule attached to the lease calls for the Blues to pay far more. Rents on the buildings totaled $6.9 million in 1992, for example, $600,000 more than the lease set out.